An overview of the corporate governance guidelines for banks and financial holding companies vis-à-vis the code of corporate governance for public companies issued by the Securities and Exchange Commission – Part 2

Introduction

In our previous publication, we explored the initial key differences between the Corporate Governance Guidelines for Commercial, Merchant, Non-Interest and Payment Services Banks in Nigeria (“CGGCMNIBs”) and the Corporate Governance Guidelines for Financial Holding Companies in Nigeria (“CGGFHCs”) (together referred to as “the CBN Guidelines”) issued by the Central Bank of Nigeria (“CBN”) and the Code of Corporate Governance issued by the Securities and Exchange Commission (“SEC”). In this second part, we will continue our analysis, covering additional aspects of governance such as board evaluation, whistleblowing, external auditor provisions and other critical areas of corporate governance.

1. Evaluation of the Board.

The SEC Code empowers the board to ensure the evaluation of the individual and collective performance of the board and its committees. It additionally prescribes the procedure for board evaluation and states that the cumulative result of the evaluation should serve as a guide for re-election. The CBN Guidelines further provide that the evaluation of the Board shall be conducted annually by external consultants in line with the extant guidelines for Annual Board Evaluation by External Consultants of Banks and other Financial Institutions in Nigeria.

The CGGMNIBs specifically requires that the report from the evaluation be presented at the Annual General Meeting (“AGM”) of the bank and the continuous unsatisfactory performance of a director shall be a basis for non-renewal of a director’s tenure.

2. Whistle Blowing Policy.

Regarding whistleblowing, the SEC Code mandates that public companies establish and enforce a public whistleblowing policy, with board support and whistleblower protection. Additionally, it necessitates the appointment of a senior-level officer, such as the Chief Executive Officer/ Managing Director (“CEO/MD”), to oversee reported cases and take appropriate action.

The CBN Guidelines require both banks and Finance Holding Companies(“FHCs”) to adhere to the recommended practice prescribed in the NCCG 2018. The NCCG 2018 mandates the establishment of an effective whistleblowing framework for reporting illegal and unethical behaviors, accessible to employees and external stakeholders. Additionally, it prescribes compensation for any whistleblower who suffers any detriments.

There is no provision in the NCCG2018 that the person(s) in charge of managing the whistle-blowing disclosures must be a senior-level officer as stated in the SEC Code.

3. Appointment of External Auditors.

The SEC Code does not specify the procedure for appointing external auditors; however, it mandates the regular rotation of the partners of the audit firm. Furthermore, it limits the tenure of external audit firms to a maximum of 10 years, with the possibility of reappointment 7 years after disengagement.

The CBN Guidelines specify that the Board shall be responsible for the appointment and removal of external auditors subject to the approval of the CBN. This is another instance where the CBN exercises oversight functions.

4. Review of Internal Shariah Compliance of the Non-Interest Banks.

While the SEC Code does not provide for a review of internal shariah compliance, the CGGCMNIBs requires external auditors to review the internal shariah compliance within non-interest banks by assessing the work of the internal shariah auditor and compliance officer.

5. Publication of the Annual Audited Financial Statement.

The CBN Guidelines provide that banks and FHCs are required to publish their annual audited financial statement in 2 national daily newspapers and on their websites. The CBN Guidelines are clear on the full disclosure of the audited financial statements of banks and FHCs while the SEC Code no provision for publication of the financial statements of a public company.

6. Removal of the External Auditors by CBN.

The CBN Guidelines state that the CBN has the authority to request the removal of external auditors from banks and FHCs if it determines that the auditor has been involved in unethical practices or illegal activities. The SEC Code on the other hand does not provide for the removal of external auditors.

7. General Meetings.

The SEC Code requires that the general meetings of public companies be the primary platform for shareholder, management, and Board interaction, conducted openly to ensure full shareholder participation and effective contribution.

The CGGCMNIBs allows the Board to rotate general meeting venues to enhance shareholder access and permits banks to hold virtual meetings when physical gatherings are not feasible. Both the SEC Code and the CGGCMNIBs aim to promote active shareholder engagement during general meetings, the provisions ensure that shareholders are given adequate opportunities to interact with management and the Board, which is essential for good corporate governance.

Read also: An overview of the corporate governance guidelines for banks and financial holding companies vis-à-vis the code of corporate governance for public companies issued by the Securities and Exchange Commission

8. Ownership of controlling interest in more than one Bank/FHC.

While the SEC Code has no clear provision on the ownership of controlling interest in a public company, the CBN Guidelines ensures that no individual, group of individuals, their proxies, or corporate entities, owns controlling interest in more than one bank or FHC except with prior approval of CBN.

This provision ensures transparency in both banks and FHCs while also limiting the extent of control a single shareholder can exert over their operations.

9. Prohibition of subsidiary ownership in an FHC.

The CGGFHCs prohibits subsidiaries of an FHC from acquiring shares in either the FHC or other subsidiaries within the group.

10. Approval for Restructuring of Banks and FHCs.

The CBN Guidelines require obtaining prior written approval and “No Objection” from the CBN before any arrangement leading to a significant change of control in a bank or FHC can be made; whereas the SEC Code is silent on restructuring.

The CBN Guidelines specifically provide that any acquisition of shares in a bank or FHC of 5% (five percent) and above will require approval from CBN.

11. Business Conduct and Ethics.

The SEC Code provides that public companies should have a Code of Ethics and Statement of Business practices, which should be implemented as part of the corporate governance practices of the company.

The provision of the CBN Guidelines is to the effect that banks and FHCs must establish a Code of Business Conduct and Ethics, which shall maintain the confidence of the public in the banks and FHCs.

Furthermore, the CBN Guidelines require that such code should be revised within a year interval, the requirement for revision was absent in the SEC Code.

12. Related Party Transactions.

The SEC Code mandates disclosures on related party transactions concerning directors’ current accounts or loans in the company’s annual reports. The CBN Guidelines provide that banks and FHCs shall implement a policy on insider trading and related party transactions, which shall be published on the website of the banks and FHCs.

13. Writing off Director Related Loans.

While the SEC Code makes no provision for writing off director-related loans or interests, the CBN Guidelines allow director-related loans and/or interest to be written off subject to the approval of CBN.

This is an innovation introduced to curtail the mismanagement of banks and FHCs funds and encourage transparency in the affairs of banks and FHCs.

14. Removal of Directors with Non-Performing Facilities.

Non-performing facilities are loan facilities that cannot make a profit due to non-payment as scheduled.

The SEC Code makes no provision for removing directors with non-performing facilities. Conversely, the CBN Guidelines provide that directors with non-performing facilities exceeding 1 year in any financial institution/banking subsidiary of an FHC will be removed from the boards of the banks/FHCs and blacklisted from serving on the board of any financial institution under the purview of the CBN.

15. Sustainability.

The SEC Code provides that public companies should prioritize stakeholders’ interests, including employees, host communities, consumers, and the public while being mindful of Nigeria’s social and cultural diversity.

The CBN Guidelines stress the importance of ethical business conduct, environmental responsibility, and stakeholder engagement. It encourages banks and FHCs to adopt the provision of the Recommended Practice 26 of the NCCG 2018 which emphasizes the importance of sustainability in business performance and portraying the Company as a responsible corporate citizen.

16. Disclosures.

The SEC Code emphasizes increased disclosure beyond statutory requirements for companies to foster good corporate governance. The CBN Guidelines provide that the annual report disclosure of banks/FHCs shall cover material information on directors, remuneration policy, share buybacks, significant shareholders, risk management practices, and strategic modifications for better decision-making.

The CBN Guidelines ensure stakeholders have comprehensive insights into the operations of banks/FHCs risk management practices and strategic modifications for better decision making.

17. Returns.

While the SEC Code makes no provisions for making returns by public companies, the CBN Guidelines state that banks and FHCs shall submit periodic returns to the Director of Banking Supervision Department at the CBN, as specified in the extant Guidelines for Licensing and Regulation of Financial Holding Companies in Nigeria.

The returns should be submitted through a dedicated web portal as prescribed by the Financial Reporting Council (FRC) for banks and FHCs shall submit their returns through a dedicated web portal as maybe prescribed by the FRC or CBN.

18. Sanctions.

The SEC Code does not prescribe sanctions for the violation of its provisions; whereas the CBN Guidelines provides that non-compliance with the Guidelines and NCCG 2018 by a bank and FHC constitutes a regulatory breach, leading to penalties determined by the CBN.

These penalties extend to personnel of the defaulting bank and/or FHC, and the penalty includes:

• Administrative action (Both the Individual and Banks);
• Monetary penalties;
• Suspension.

Unlike the SEC Code, the CBN Guidelines established a clear and comprehensive framework for enforcing compliance and accountability within banks and FHCs and their personnel. The outlined sanctions serve as a deterrent against non-compliance and dishonest practices, promoting transparency and adherence to regulatory standards. By incorporating measures for both the institution and individuals responsible for any breaches, it emphasizes the importance of upholding the Guidelines and NCCG 2018 for sound governance and risk management.

Conclusion

The CBN Guidelines play a critical role in promoting accountability, transparency, and good corporate governance practices in the banking sector in Nigeria. It increases the CBN regulatory oversight over financial institutions in Nigeria and its innovations promote the ease of doing business in Nigeria.